Critically discuss the view that capital markets created the Essay - 3

Critically discuss the view that capital markets created the conditions that led to the new economy bubble and the banking crisis - Essay Example This is attributed to the fact that when a firm or a nation borrows money from the capital markets, the reason is often to invest in additional physical capital products that will be utilized to increase income. It usually takes several months or even years before the investments start generating sufficient return to pay back its cost thus leading to an economic crisis. Capital markets are usually concerned with long tern finance. It comprises of a series of channels through which the communities’ savings are made available for commercial and industrial enterprises and public authorities. Therefore, Chisholm (2009) defines capital markets as financial markets which are tasked with the buying and selling of equity-backed securities or long-term debt. These markets usually channel the wealth of the savers to those who have the capability of putting it into long-term use. The paper will offer evidence supporting the view that capital markets created the conditions that led to the ‘new economy’ bubble and the banking crisis. According to a view shared by Rudd (2009), prescriptions of the neo-liberal policy flow from the major theoretical belief in the superiority of unregulated markets, especially unregulated capital markets. These claims is based on the "efficient-markets hypothesis" , which claims that financial-market prices, such as stock-market prices incorporates all the available information representing the best possible estimate of asset prices. Therefore, it follows that if prices fully informed and markets are fully efficient, there exists no reason to believe that asset-price bubbles are probable which means that if these do occur, markets will self-correct. In the neo-liberal view, deviations from market efficiency are as a result of external causes. They ascertain that bubbles and other disruptions are caused by governments and other "imperfections", and